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Du Plessis stalls iron-ore growth as Rio opts for ‘any-and-all’ debt cutting

5th May 2016

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – While South African-born Rio Tinto chairperson Jan du Plessis was vowing not to expand Rio’s iron-ore division beyond 360-million tonnes a year, the globally perceived over-producer of iron-ore was outlining the steps it had taken to cut near-term maturing gross debt by $1.5-billion.

Rio said the debt-cutting involved $1.359-billion of its gross debt being dealt with under an any-and-all offer and $141-million under a Dutch auction offer.

On the same day, the Sydney Morning Herald quoted Du Plessis as reassuring an Australian meeting of shareholders in Brisbane that Rio would not oversupply the iron-ore market, the company’s biggest money-spinner.

This assurance came against the backdrop of bitter criticism being levelled at Rio and BHP Billiton by smaller iron-ore producers over their alleged deliberate oversupply of iron-ore as a way of crushing competitors, which include South Africa’s stressed Kumba Iron Ore.

Smaller producers charged, however, that all that had been crushed was the Australian economy itself.

At the Global Iron Ore Conference in Perth earlier this year, Cliffs Natural Resources CE Laurenco Goncalves pulled no punches when he outlined how $290-billion had been wiped off the market capitalisations of BHP Billiton and Rio Tinto to move Australia from a 59% iron-ore market share in 2014 to 64% last year, and for Brazil, through Vale, to move from 18% to 20%.

“When you have 59% market share, what the hell do you need more market share for? And then you go to 64% and destroy $290-billion to do that? And you guys think that’s okay?” Goncalves tongue-lashed, while Fortescue chairperson Andrew Forrest echoed the comments and reiterated his call for a Senate enquiry into the way in which a finite national patrimony like iron-ore was being decimated, to the detriment of future generations.

AGAINST INDIGENOUS AMERICANS

At Thursday’s Rio meeting, shareholders also quizzed the company on its Resolution copper project in the US, which Democratic Party contender for President of the US in the 2016 election Bernie Sanders had set his sights against on the basis of Rio and BHP Billiton accessing land indigenous Americans regard as sacred.

However, outgoing Rio CEO Sam Walsh, who will in July hand over to incoming CEO Jean-Sébastien Jacques – once part of the Rio team at South Africa’s Palabora mine – justified the occupation of the hallowed US land on the grounds that it was one of the world's largest undeveloped copper assets.

"Clearly in that copper triangle there, it will create economic benefits for us and also for the community, particularly in areas with the Native American Indians where there is up to 70% unemployment in those communities. It is going to be critically important for the local Native Americans to have employment in an area where there is no other way," Walsh was quoted as saying.

IRON-ORE SUPPLY OUTLINE

Du Plessis explained that Rio was “not yet fully utilising” the 360-million-tonne rail and port export capacity that it had built and it would export between 330-million tonnes and 340-million tonnes in 2016.

"We have no plans at the moment at all to extend our infrastructure capacity beyond the 360-million tonnes,” he was quoted as saying.

Jacques revealed that the Mongolian government would get more than 50% of the value of expansion of the Oyu Tolgoi copper mine in Mongolia, despite owning only 34%.

Jacques told shareholders his focus would remain firmly on productivity improvements during a macroeconomic period that he foresaw as remaining tough.

He believed the company’s tier-one assets would not be sufficient to shield it and that the company would need to be more productive, performance-driven and proactive in its engagement with stakeholders and society.

Cost-cutting initiatives had delivered savings of $6-billion-plus and 2016 capital expenditure was being lowered to $4-billion in 2016, through a process of reassessing projects, lowering costs and only investing in the highest-returning projects.

Iron-ore was selling at just over $60/t at the time of going to press and copper at $2.21/lb.

ANY AND ALL

Rio said in the media release on debt cutting that the final aggregate principal amount of securities purchased under the any-and-all offer was $1.359-billion.

It added that only $141-million of Dutch auction securities would be purchased.

The lead dealer managers for the offers were Merrill Lynch, Pierce, Fenner & Smith and RBC Capital Markets, with BMO Capital Markets, CIBC World Markets, Nabsecurities and TD Securities the co-dealer managers.

The company was targeting a further $2-billion cut in operating costs over the next two years and implementing a new dividend policy, actions designed to maintain balance-sheet strength and deliver shareholder returns commensurate with the economic environment.

Edited by Creamer Media Reporter

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